Sizing Up 'Shadow Inventory'

The first and second quarters of 2009 were among the busiest months the REO industry has ever seen. Servicers and lenders struggled to process the volume, and REO outsourcers found themselves near capacity, most notably in the months of June and July. In response to this influx, there was a marked increase in the number of REO outsourcing companies entering the marketplace, and the GSEs began designating these new firms to assist in handling the volume.

When the flood of REO properties began to inexplicably decrease near the third quarter, many in the industry initially assumed we were merely entering the eye of the hurricane, as rumors persisted of huge REO backlogs. However, by October 2009 the decline began to affect most REO outsourcing firms when the added cost of personnel and overhead began to take its toll on the bottom line. Outsourcers who only months before had seen record referral volumes experienced a precipitous drop in volume.

Moreover, many servicers who had relied on these outsourcers during the previous months began to retain much of this work to be processed in-house when possible. It was not long before many in-house REO departments began to feel the pinch and embarked on the arduous task of laying off their workforce or reallocating their resources. Much of the REO business had simply vanished, and it left many wondering where the work had gone.

Some industry veterans believe pressure from the current administration which had funneled billions of dollars to save many of the larger lenders simply pressured them to curtail foreclosures. This directive was more or less achieved with HAMP. Most servicers simply did not have the capacity, expertise or systems to engage HAMP and began utilizing outside resources to implement this new program. After a period of time, vendors as well as servicers that support the default market began to perfect the HAMP process and many homeowners were able to receive loan modifications. Unfortunately with the high unemployment rate, the number of loan modifications that the administration predicted HAMP would help has fallen short.

As the inventory of homes for sale decreased due to lack of new REOs, sale prices and home values began to increase and to further fuel the real estate rebound, the administration extended the first-time homebuyer tax credit, which added a credit for "move-up" buyers and continued to manipulate the bond market to keep interest rates at historic lows. In many markets home values have now stabilized or started to increase.

This leaves many of us wondering what is on the horizon for 2010. Many believe the administration will continue to work with servicers and investors to help stabilize the housing market and further expand various programs from the treasury department, as we will probably see through two new initiatives for the service industry, HAMP 2 and NAFTA. These will most likely keep servicers busy through 2010.

It appears we will continue to see new foreclosures and REOs throughout 2010 as many properties will escape loss mitigation before HAMP 2 and NAFTA take effect. With that being said, it is unlikely we will anticipate a significant influx of potential backlogged REO properties until the economy finds more solid footing and the unemployment rates return to a more acceptable level. The so called shadow inventory may very well remain in the shadows, at least for this year.

Brandy Green is vice president of REO at Prommis Solutions LLC, Atlanta.

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